This company found a unique way to skirt SEC accounting rules

Videogame maker is only delaying the inevitable as it flouts a Securities and Exchange Commission standard for the treatment of deferred revenue

Videogame maker Activision Blizzard is playing a numbers game with its earnings reports that seems to directly flout Securities and Exchange Commission rules.

The Santa Monica, Calif.–based company ATVI, -0.03% received a letter from the SEC in 2016, telling it to drop revenue deferrals from its non-GAAP numbers — earnings-report figures that do not comply with Generally Accepted Accounting Principles, or GAAP. The company is instead asking journalists to make a calculation so that they will in turn provide the regulator-prohibited adjusted revenue number to investors.

The letter came after the SEC last year issued renewed guidelines for companies on the use of non-GAAP measures, which companies say help them provide extra information to investors and strip out one-time items such as litigation- or merger-related charges. The regulator took the view that non-GAAP numbers can be misleading, especially when companies use them as a substitute for GAAP numbers, or when they use metrics that sound exactly like GAAP ones. The crackdown came after a period in which non-GAAP numbers had proliferated, with many companies using tailor-made numbers to make their earnings appear stronger, as MarketWatch has reported.

Companies are obliged to present their earnings using GAAP but are allowed to use non-GAAP measures to supplement the information. However, they must start with GAAP, give equal prominence to the two, and fully explain how they differ.

‘I think such metrics would distort the picture of how well the company is doing; I completely support the disallowance by the SEC.’
Edward Ketz, Penn State
High-tech and gaming companies were identified by the SEC as especially troubling in their use of non-GAAP and performance metrics, which include such things as numbers of registered users to a company’s website, numbers of active users, daily and monthly average usership, average revenue per user and numbers of paying players.

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“Activision Blizzard was one of the first companies to receive a deferred-revenue non-GAAP question,” said Olga Usvyatsky, vice president of research at Audit Analytics. “This is a very strong indication that this non-GAAP revenue adjustment could be misleading.”

Finding consensus

In a response to May 2016 letter from the SEC, Activision said management excludes the change in deferred revenues and related cost of sales internally, when evaluating the company’s performance or making forecasts.

“Management believes this is appropriate because doing so enables an analysis of performance based on the timing of actual transactions with our customers, which is consistent with the way the company is measured by investment analysts and industry data sources,” then–Chief Financial Officer Dennis Durkin wrote. “In addition, excluding the change in deferred revenues and the related cost of sales provides a much more timely indication of trends in our operating results.”

Durkin, now the company’s chief corporate officer, vowed Activision would review and reflect on the SEC guidance when preparing its next report.